Greetings, and welcome to the Coherent First Quarter Fiscal Year 2026 Earnings Call. It is now my pleasure to introduce your host, Mr. Paul Silverstein, Senior Vice President of Investor Relations for Coherent. Please go ahead.

Thank you, operator, and good afternoon, everyone. With me today are Jim Anderson, Coherent's CEO; and Sherri Luther, Coherent's CFO. During today's call, we will provide a financial and business review of the first quarter of fiscal 2026 and the business outlook for the second quarter of fiscal 2026. Our earnings press release can be found in the Investor Relations section of our company website at coherent.com. I would like to remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements or predictions based on information that is currently available and that actual results may differ materially. We refer you to the documents that the company files with the SEC, including our 10-Ks, 10-Qs and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This call includes and constitutes the company's official guidance for the second quarter of fiscal 2026. If at any time after this call, we communicate any material changes to this guidance, we intend that such updates will be done using a public forum such as a press release or publicly announced conference call. Additionally, we will refer to both GAAP and non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends. For historical periods, we provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings release and investor presentation that can be found on the Investor Relations section of our website at coherent.com. Let me now turn the call over to our CEO, Jim Anderson.

Thank you, Paul, and thank you, everyone, for joining today's call. Coherent is the world's leading innovator and provider of photonic technology and solutions. Photonics is critical to growing applications in AI data center networks, communications and a wide range of industrial applications. We're well positioned for long-term growth across all these applications and especially in AI data centers where we're experiencing unprecedented demand for our optical networking products. In particular, we expect continued strong sequential revenue growth throughout this fiscal year given the record level of orders we are receiving from our customers and the continued expansion of our production capacity. In addition, we continue to streamline our portfolio and ensure that our investments are focused on the areas of greatest long-term growth and profitability for the company in order to drive sustained shareholder value creation. Turning to our Q1 operating results. Revenue increased by 6% sequentially and 19% year-over-year on a pro forma basis, which excludes revenue from our recently divested Aerospace and Defense business, a sale that enhanced our portfolio focus and accelerated deleveraging. Non-GAAP gross margin expanded by 70 basis points sequentially and 200 basis points year-over-year. The combination of revenue growth and gross margin expansion drove non-GAAP EPS growth of 16% sequentially and 73% year-over-year. I'll now provide some highlights from our 2 operating segments. We'll begin with our Datacenter and Communications segment, which is our largest and fastest-growing business, Q1 revenue grew by 7% sequentially and by 26% year-over-year driven by growth in both our Datacenter and Communications markets. In our Datacenter business, Q1 revenue grew 4% sequentially and 23% year-over-year. Our Datacenter growth in Q1 was constrained by the supply of indium phosphide lasers. However, we expect data center growth to accelerate to approximately 10% sequential growth in the current quarter followed by…

Thank you, Jim. We are pleased with our first quarter 2026 results and execution. We continue to drive strong double-digit year-over-year revenue growth, gross margin improvement and enhanced profitability. We significantly paid down our debt, reducing our interest expense and further strengthening our balance sheet. At the end of the quarter, we successfully completed our debt refinancing, lowering our cost of capital and improving our financial flexibility. I will now provide a summary of our Q1 results. First quarter revenue was a record $1.58 billion, up 3% sequentially from the fourth quarter and up 17% year-over-year, driven by growth in AI data center and communications demand. In our Q4 25 earnings call, we announced an agreement to sell our Aerospace and Defense business. As expected, this transaction closed in Q1 '26. On a pro forma basis, excluding $33 million of Aerospace and Defense revenue for Q1, revenue increased 6% sequentially and 19% year-over-year. Our Q1 non-GAAP gross margin was 38.7%, a 70 basis point improvement compared to the prior quarter and a 200 basis point improvement as compared to the year ago quarter. I am especially pleased with the progress we have made on gross margin expansion, driven by the cost reduction and pricing optimization initiatives that we continue to focus on as we drive to our target model of greater than 42%. The sequential and year-over-year increases in gross margin were driven by cost reductions and product input costs as well as yield improvements primarily in our Datacenter and Communications segment. Pricing optimization contributed meaningfully in both the Industrial segment and the Datacenter and Communications segment. First quarter non-GAAP operating expenses were $304 million compared to $307 million in the prior quarter and $278 million in the year ago quarter. Operating expenses as a percentage of revenue declined to…

[Operator Instructions] Our first question comes from Samik Chatterjee with JPMorgan Chase.

Jim, maybe if I can start on the demand side. You do mention the strong demand you're seeing as well as record orders in some cases. Maybe if you can flesh that out a bit more, like how broad-based is this and what are you seeing in terms of or hearing from customers in terms of demand drivers and how broad-based across the portfolio is the demand across your Communications portfolio? And I have a follow-up.

Yes. Thanks, Samik. Yes, I would call it very broad-based. So very strong demand across both Datacenter and Communications. When I look back at our fiscal Q1, really saw a record level of bookings in that quarter. And bookings not just for near-term quarters, but bookings further out in time than we normally would see. So bookings leading out, in some cases, over a year from now, right? So we see that as a very good sign. That's customers placing orders well ahead of time. That gives us great visibility, really allows us to really good mix -- planning and product mix and capacity planning. But also, as I said, broad-based, definitely saw strong orders for data center, strong orders, in particular, for 800 gig and 1.6T transceivers. We're seeing the adoption of 1.6T transceivers accelerate. And so we're seeing certainly strong orders there. But also on the communications part of our business, very strong orders in DCI, the data center interconnect portion. This is our ZR/ZR+ product lineup of transceivers. And then also really pleased to see strong orders in what I call kind of traditional telecom as well. And so in particular, in that Communications segment, we've seen now 5 quarters of sequential growth in that segment, really good grower last quarter of 11% sequential and 55% year-over-year, but we've seen now 5 sequential quarters of growth in not just DCI, but also in traditional telecom. And we're expecting that Communications segment to grow sequentially this quarter and through the balance of this fiscal year.

Got it. Got it. Indium phosphide capacity, I mean that's been quite a talking point this quarter for you guys. You outlined you're doubling the capacity over the next 12 months. But maybe if you can just flesh out for investors what are the milestones to watch on that front? And how to think about the road map beyond even a 12-month horizon? And where would that leave you from an EML mix perspective in relation to sort of internal versus external?

Sure. Thanks, Samik. So first of all, I just want to thank the Coherent team for the outstanding job they've done in getting 6-inch indium phosphide up and running. This is something when I joined the company that I asked the team to significantly accelerate their time line. And I just want to take the opportunity to thank the team for the outstanding job they've done. We started production of 6-inch indium phosphide in the September quarter and started it at our Sherman, Texas facility and really pleased with that ramp. As I mentioned in the prepared remarks, one of the big milestones that we achieved is the initial yields of that 6-inch indium phosphide are actually higher than our 3-inch indium phosphide lines. And keep in mind that those 3-inch lines are very mature full production lines. So that's a very positive milestone and positive signal for us on yields of 6-inch. And that's exactly why we decided to double down on the ramp of 6-inch and begin 6-inch ramp at a second facility -- one of our second our other indium phosphide facilities, which is in Jarfalla, Sweden. And so now we're ramping at 2 sites in parallel. And so that's what really allows us to hit that 2x capacity goal about a year from now. And I think milestones along the way will certainly be -- we'll certainly share our progress along the way. But beyond the next 12 months, we expect to continue to expand capacity even beyond that 12-month goal. The demand that we're seeing from our customers is, I would call it, extremely strong. And with some of our big customers, they're showing now their forecast out through calendar 2028. And given that demand signal that we're seeing, not just for next calendar year, but now for '27 and '28, our plan is to continue to ramp indium phosphide capacity beyond the next 12 months as well. And certainly, we'll share more thoughts on the rate and pace of that ramp over the next 12 months.

Got it. And I'll just squeeze one quick one in. You're guiding data com 10% quarter-over-quarter growth. Just wondering what's sort of supply-demand gap that you see? How supply -- what could that number be if you were sort of more flexible on supply or had more supply available relative to sort of the constraints on that front?

Yes. We were certainly -- when I look back at the prior quarter, data center grew about 4% sequentially. That was certainly constrained by indium phosphide laser supply. And what we saw is the unmet backlog that we had in Q1 rolled into Q2. So that backlog is now in Q2, and we're servicing that in Q2. But on top of that, we had record bookings on top of that for, as I mentioned, 800 -- primarily 800 gig and 1.6T transceiver. And so the demand continues to grow. Now one of the really good things as we move into the current quarter is we're seeing indium phosphide supply, both internal and external grow sequentially from prior quarter to current quarter, and we're expecting both external and internal supply to grow again from this quarter into the -- into our fiscal Q3 as well. So we're seeing kind of steady good improvement in indium phosphide capacity. And again, that's a combination of external, but especially internal capacity expansion as well.

Our next question comes from Simon Leopold with Raymond James.

I wanted to follow up on your discussion around the OCS, optical circuit switches. There was quite a buzz at the ECOC show about this, and you certainly sounded upbeat tonight. I guess, what I'm looking for a little bit more help is understanding how to think about maybe, let's call it, calendar 2026, where one of your peers also participating in the market has sort of laid out a trajectory to get to $100 million a quarter. How do you think about your trajectory and your place in the OCS market?

Yes. Thanks, Simon. So first of all, we feel really good about our place in the market. It starts with, of course, the technology. We feel really good about the technology differentiation that we have. We have a nonmechanical -- our OCS is based on a nonmechanical liquid crystal technology that has really superior reliability performance and our customers recognize that. And I would say that we continue to see the opportunity around OCS, the total available market continue to be bigger than what we may have originally thought. Just the number of customers is broader than we thought that are interested in the technology, but also the number of applications that they're considering deploying it in. And so as I mentioned in the prepared remarks, we've now shipped systems to 7 different customers. And we -- if I look at last quarter, both our revenue and our backlog grew last quarter. We expect revenue and backlog to grow again this quarter. But I think a more meaningful revenue contribution will come in next calendar year. Probably we'll see a steady ramp of revenue throughout calendar year. So it will be certainly more weighted towards the second half of calendar year. But we feel really good about the progress, the backlog that we have and the revenue ramp in front of us. And we'll -- as we get into next calendar year, I think we'll share more details about kind of the rate and pace of revenue that we see ahead of us.

And then you talked a lot about the progress you've shown on the indium phosphide. I've been fielding investor questions that I find a bit puzzling, but maybe you could help us shake this out in that there's been sort of this narrative that the indium phosphide is producing photodiodes and hasn't helped you with laser production. But your outlook, your commentary on 800 gig, 1.6T, certainly suggests that you're producing more lasers, both CW and EML. Can you explain maybe how people might have been confused or whether I'm confused? Can you give us some clarification on this debate?

Yes. Thanks, Simon. I'll try to unconfuse. I don't know where the confusion is coming from. But I'll just kind of reiterate what I said in the prepared remarks. So as I said, we're ramping production now in 2 sites, Sherman, Texas and Jarfalla, Sweden. And across those 2 sites, we're ramping production of 3 different types of products based on indium phosphide, right? So the EML lasers, certainly, CW lasers as well and then photodiodes. And all 3 of those are very critical, as you know, Simon, very critical components to our transceivers. And so really pleased to be ramping production of all 3 of those devices across those 2 facilities.

Our next question comes from George Notter with Wolfe Research.

I'm just curious on -- interesting to hear your remarks on sort of the manufacturing moves and then the real estate footprint, really, really great to see that. I guess, I'm just curious on how much more opportunity is there? I know you're standing up capacity. I think in Penang, you said. Are there more moves for you to make in manufacturing, perhaps in industrial lasers? Is there more real estate consolidation left? Any more you could say would be great.

Yes. Thanks, George. So I would say definitely, a lot of activity that we have going there. And it's kind of interesting because it's -- on one hand, we're increasing capacity and expanding. And on the other hand, what we're trying to do is consolidate and reduce footprint in certain areas. And so we're -- and both of those activities are happening in parallel. So if I start with the consolidation, if we look at over the last roughly 5 quarters since the beginning of our fiscal '25, we've either sold or exited 23 sites. And I think that's great progress. We're really pleased with that, but we definitely have more work to do. I think both Sherri and I are focused on making sure we maximize return on invested capital, and we're driving efficiency and productivity across our physical footprint. And so we both believe there's significant opportunity to continue to consolidate. And so we'll continue to exit and downsize any site that we view as unnecessary or underutilized. And so definitely more work to do there, and I would say stay tuned on that. And then on the increase side, certainly, especially for Datacenter and Communications, we're certainly increasing capacity. We talked a little bit already about indium phosphide capacity. But if we talk about module capacity, so this is transceiver module capacity. We're expanding capacity at our existing facility, our primary facility in Malaysia, which is in Ipoh, Malaysia. But now in parallel, we're expanding capacity at a new transceiver facility that we've recently opened, which is already in production on transceivers. We're going to be expanding and accelerating capacity at that Penang facility. And then what we're also doing is adding transceiver module capacity at our Vietnam site. So the great thing is our Vietnam site already exists, and it's already building components for transceivers, and we have capacity and room there to add now transceiver production in addition to component production, and we're excited about that, too. And -- so all of those capacity expansions we're driving in parallel. And that's really to support the strong demand that we see ahead of us for both data center and communications that based on the customer, not just ordering that we're seeing, but the forecast that we're getting.

Got it. Any manufacturing moves on the Industrial side of the business?

Yes. There are a number of the consolidations that we've done. The 23 sites of sales exits. Those have -- some of those have been on Datacenter and Communications side, but many of those have been on the industrial side. And so I think we still see opportunity for consolidation on, I would say, both Datacenter and Comms and Industrial. But there are places within the Industrial segment where we are investing and expanding in facilities as well. But it's all about trying to make sure that the footprint is optimal in terms of driving the maximum productivity and efficiency of the facility.

Our next question comes from Blayne Curtis with Jefferies.

I wanted to go back to the datacenter guide plus 10%. Is there a way to think about how much that is still capacity constrained? And is there anything beyond EMLs that is constrained in that?

No. Blayne, I would say the primary constraint we've hit, for instance, last quarter is, as I said, it's indium phosphide capacity that specifically EMLs, that was what was constraining us. A significant improvement from prior quarter into the current quarter, as I said, in terms of both external and internal supply. I would say there's still -- we still are constrained to some degree even in the current quarter, but we also expect indium phosphide laser supply to increase again from current quarter into next quarter and really to continue to -- the supply to continue to improve throughout -- sequentially throughout the next calendar year, given external capacity that we've secured, but especially the internal capacity ramp that I talked about earlier.

Exactly that, maybe I'll follow up on that. I'm curious, you're doubling capacity, but it takes time to get your lasers in and qualified. So -- is there a way to think about the timing? And is there any difference between EMLs and CWs in terms of the timing of recognizing revenue from the lasers throughout the fleet?

Yes, I would say not a big difference between EML and CW on the timing to get into production and fully qualified. By the way, you mentioned recognized revenue, just to clarify, all of our EMLs and CWs are made for internal consumption, right? So we don't sell indium phosphide in the open market. The reason for that is it's -- all of our capacity is 100% consumed by our own transceiver needs. I just want to make sure I clarified that. But within transceiver, what I would say is that once a laser is qualified within -- or photodiode within a facility, expanding capacity on a parallel line or on an existing line is a pretty normal occurrence, right? No special qualification required or at least the qualification very straightforward, right? So I think now that we're in production across multiple products, across multiple facilities. Look, that production capacity is going to be as we expanded over the course of the next year is going to be incredibly valuable. And certainly, our customers are very motivated to help make sure we get anything qualified into production as quick as possible.

Thank you. The next question comes from Tom O'Malley with Barclays.

First one is a little more short term. So you gave the sequential into December on data com up 10%. Could you maybe help us understand what was the driver in the September quarter? I think you called out datacom as maybe being a little bit more of a driver, but any color on the telecom side or the relative vectors of both? And then into the December quarter, what are you seeing from the telecom business?

Yes. And maybe I'll just recap the prior quarter first. So on the prior quarter, data center, we saw grow 4% sequentially, 23% year-over-year. Communications, which is telecom and DCI in the prior quarter, it was 11% sequential growth and 55% year-over-year. And into the current -- into the December quarter, we expect the data center growth to accelerate from that 4% prior quarter to about 10% sequential growth in the current quarter. And then comms, again, up sequentially. I would expect it to be a little bit less than what it was in the prior quarter. Comms would be up sequentially in the single digits. And then just to round it out and give you the full picture on the industrial part of our business, we expect that in the current quarter for that to be sequentially stable, maybe slightly up.

Helpful. And then just a longer-term question, just on the 6-inch production sort of a couple of questions on it here. But is there a way for us to tie production coming out of that 6-inch facility with margin improvement over the -- it sounds like things are accelerating pretty materially on the capacity expansion side in the first half. I think you had previously kind of talked about first kind of guys moving into modules in late calendar year 2025. But as that kind of progress, like you look at what gross margins have done, you would imagine that accelerate a bit. Any way for us to link the percent of production, the amount of production to how much gross margin expansion you see?

Yes. Maybe I'll kick it off and at least talk about it qualitatively and then if Sherri wants to add anything to it. I think given that we just started production in the prior quarter, actually, this quarter will be our first quarter -- our first full quarter of production. We started production last quarter, kind of mid-quarter. The actual impact to gross margin in the current quarter is pretty minimal. But as we move into next calendar year, that's where we'll start to see the benefits of the 6-inch production moving into our gross margin. And as you would expect, as we ramp production, the impact to gross margin is more meaningful as we move throughout the calendar year. And so you should expect it to be more meaningful as we move through each sequential quarter. And Sherri, would you -- is there anything you'd add to that or.

Yes, I'd just add that when you look at these -- the 6-inch indium phosphide and the fact that it's less than half the cost of 3-inch that will be beneficial to gross margin over time. And it's sort of looking at a cost structure, right? It's improving the cost structure, the 6-inch indium phosphide is. And other examples of that would be with new products, right, like 1.6T, that's going to be beneficial to gross margin as well as when we ramp capacity, those types of things will help improve the gross margin over time.

So we're certainly focused on 6-inch is -- I guess, I'd recap it by saying 6-inch is one of the gross margin tailwinds. But there's certainly a wide range of other things we're focused on across the company to drive towards Sherri's 42% gross margin target that she gave us. There's a number of other -- I'd just highlight in the Industrial business, although the growth is relatively stable, we're not seeing a tremendous amount of growth in the Industrial business at this time. We're certainly focused on driving gross margin expansion within that business. And so that's another area that we expect gross margin to continue to improve for the company.

Our next question comes from Papa Sylla with Citigroup.

Congrats on the very strong result. Jim, I was hoping you can double click a little bit on the uptake you expect in the December quarter coming from 1.6T. I understand you are quite flexible between EML [indiscernible] or even VCSEL, but in terms of kind of percentage or even qualitatively, where are you seeing perhaps the larger demand between those 3? And do you expect that to change in 2026?

Yes. Thanks for the question. So -- yes, as I mentioned in the prepared remarks, the sequential growth in datacenter, a good chunk of that is driven by 1.6T revenue. And then within that, that early wave or first wave of 1.6T revenue, it's really a combination of -- we expect a combination of silicon photonics which uses obviously CW lasers, but also EML-based 1.6T transceivers. So the first adoption in that first wave of -- or the beginning of the ramp of 1.6T, that will primarily be driven by a mix of silicon photonics and EML. And then later, we'll start to see, we believe, adoption of VCSEL-based 1.6T transceivers. So those use our 200-gig VCSEL technology, which we demonstrated at, I believe, OFC earlier this year. We would expect that to begin to go into production. I would say, mid-calendar 2026, so it would start to generate revenue in kind of the second half of calendar '26. So definitely, the early ramp or the first part of the ramp is driven by a combination of EML and silicon photonics.

Got it. That's very clear. And for my follow-up, Jim, I'm curious on how you are thinking about allocation of your indium phosphide capacity between EML, CW and photodiode. I guess, how far ahead do you need to make that decision and perhaps what are the factors that go into that decision? Is the priority mainly kind of feeding where demand is strongest? Or is there a profitability angle as well?

Yes. It's a good question. Let me talk about the trade-off between, first of all, EML and CW. I would say there's no -- from our perspective, there's no significant profitability trade-off between those two. Really, what drives the mix of -- our production mix of EML versus CW is purely the demand from our customers, right? So if it's more silicon photonics-based transceivers, then we'll allocate more capacity to CW lasers. If it's more EML, we'll allocate it to EML. And I think in general, we can make those choices certainly 6 months ahead of time. Even -- we can even make those choices even 4 months ahead of time. So I would say somewhere to the kind of 4 to 6 months ahead of time, we have to do the capacity planning between EML and CW. And the good thing about the indium phosphide capacity is it's fungible. We can move the capacity to either EML or CW. And then for photodiode, that's just the receiver for the laser, right? So we just build the number of photodiodes that are needed to receive the laser signal. So that's a pretty straightforward calculation, right? So that's kind of how we do the capacity planning. Ultimately, it's really driven by the mix that our customers want in terms of EML versus silicon photonics transceivers. And we have both. So we're happy to support the customers in whichever version that they need for their application.

The next question comes from Michael Mani many with Bank of America.

This is Michael Mani on Vivek Arya. As you look out over the next year, what's your confidence level in your ability to expand your share in 1.6T over 800 gig? And could you also talk about the 1.6T ramp from a customer breadth perspective? Is this a ramp that's very concentrated with a few customers? Or are you seeing more of a balanced ramp into next year?

Yes. Thanks, Michael. Maybe I'll ask -- answer the second part first and come back to the first part of the question. On the second part of the question, we are seeing 1.6T across -- ramp across multiple customers. So we have multiple customers that are engaged in 1.6T, and we expect to ramp with multiple in parallel. And I would say that the other color I would add is that a number of customers are accelerating their time and their ramp on 1.6T. And we view that all as a good thing, right? We view that as positive. We have really proud of the lineup of 1.6T transceivers that we have. Just as a reminder, at OFC earlier this year, we were the only company that demonstrated 1.6T transceivers using 3 different technologies, silicon photonics, EML and VCSEL. So I think we have a great product lineup. We have good customer position. We're seeing acceleration of 1.6T, and we feel like we're certainly well positioned for that. So, I guess, to the first part of your question, yes, we feel really well positioned on 1.6T. I think as we enter the calendar 2026, we expect both -- on a year-over-year basis, we expect 800 gig will still grow on a year-over-year basis. We're seeing very strong demand on 800 gig. But on top of that, we expect 1.6T to ramp at a very healthy pace.

Great. And for my follow-up, I just wanted to ask about your progress on portfolio optimization and specifically pricing. So it seems like there's been a good amount of progress there in the last couple of quarters, but how much left is there in terms of these pricing tailwinds you can recognize, whether it's from the core data com side or industrial? And maybe more specifically as well, just what are you seeing from a pricing perspective for transceivers? Just if you could talk about that environment.

Maybe I'll answer the last part of the question on transceivers, but I'll let Sherri also comment on pricing as it relates to gross margin. I would say on pricing of transceivers, pricing dynamic very much as we would expect. So I don't think we're seeing anything unexpected with respect to pricing. And then, of course, in a more supply-constrained market in general, that's certainly always a positive dynamic for pricing. And then kind of in the first part of your question, just sort of pricing optimization in general and how it relates to gross margin, I'll ask Sherri to answer that part.

Sure. Thanks, Michael. So from a pricing optimization perspective, I was really pleased to see that during the quarter, we -- part of the improvement in gross margin, the 70 basis points improvement sequentially and a 200 basis points year-over-year, part of that was due to pricing optimization. Pricing optimization in our -- where we saw benefits in the Industrial side of our business as well as in the Datacenter and Communications part of our business. So pricing is an area where we tend to expect that the greater magnitude would come from the Industrial part of our business, but we do see benefits as well in the Datacenter and Communications part of our business. And pricing is really pricing our products for the value they provide. And in the Industrial part of our business, that's the part of our business where, in many cases, we are the only provider of those products. And so our customers are -- certainly value the products that we provide to them and how we help them differentiate. So that's one key part of the improvement that we saw during the quarter. But the other part, just to round out the commentary on the gross margin, we also saw improvements from cost reductions. And so that was an area where we saw benefits in yield, which, if you recall, for the past so many quarters, we've been talking about yield improvements. We continue to focus on that, and we saw those benefits in Datacenter and the Communications part of our business as well as lower product input costs. So those are 2 main levers that we're really focused on to drive to our long-term target model of over 42%. So I was really pleased to see those results.

Our next question comes from Meta Marshall with Morgan Stanley Investment Management.

A couple of questions. Sherri, last quarter, you called out kind of FX headwinds to gross margins. And just -- given some of those currencies have remained stronger, just wanted to kind of get some context of whether there was additional kind of headwinds this quarter on gross margins? And then second, noted that you guys are ramping the ZR kind of capacity. But just how you guys are thinking about kind of intersecting some of the scale across demand that we're seeing, whether that will kind of -- the ZR will layer into that or just how you guys are kind of ramping capacity there?

Yes. So Meta, on the first part of your question regarding FX and the impact to gross margin, did we have any headwinds during the quarter? So nothing material. Certainly no incremental headwinds in terms of a negative impact from the prior quarter, but nothing significant during the quarter to note on FX.

And on the second part of the question on the scale across demand, yes, I would characterize this demand is exceptionally strong. And obviously, that's driven by -- these are the optical connections between the data centers where we're seeing these AI workloads that are spanning multiple data centers, and that's driving the need for an expansion in high-speed optical networking between these data centers. And our portfolio of products, our ZR/ZR+ portfolio of products is just a really great match for this application. So we're seeing very good demand there. And we have 100 gig, 400-gig and 800-gig ZR/ZR+ transceivers. So we're certainly ramping capacity as quickly as we can on those transceivers. The other way we participate in that market, though, is we're a module vendor for ZR/ZR+, but we also sell components into all sorts of DCI equipment and applications. And I would say there, again, the demand on the components right now is extremely strong. And we are also ramping capacity for all of the components that go into DCI applications and any related telecom applications. So we're seeing just as one example, the pump lasers that we produce, we're seeing just very strong demand on those pump lasers.

Our next question comes from Ruben Roy with Stifel.

Jim, maybe a follow-up on the OCS commentary with the shipments to 7 different customers, great to see the diversification of customers there. In terms of applications, you talked about sort of getting -- you're talking through engagements on a broader number of applications. How would you characterize the kind of the wins that you have today? Are those -- and I think the industry has been talking about redundancy, use of OCS for redundancy and maybe even packet switch replacement. Should we think about those as being sort of the initial applications? Are you starting to see a broadening today of some of the other applications that you can address? And are there technical advantages of using a nonmechanical in some of these new applications that you guys are talking about?

Yes. Thanks, Ruben. Great question. No, I would say that the initial adoption in terms of like the backlog and initial production ramp adoption is very much the way you summarized it in redundancy applications or spine switch applications and more of what we've seen historically as traditional applications for OCS. I think further out, though, what we've been surprised about is if you look beyond just kind of the near-term demand as we've engaged with a broader set of customers is there's applications beyond that, that customers are talking about and engaging with us on all the way from some customers were talking about even using an OCS switch in a scale-up network, right, a scale-up network where the optical -- where the connections are now optical and there's an OCS switch within that. And then on the other end of the spectrum, customers talking about using OCS switch even within DCI networks. So we've been surprised as we've engaged with customers by the real broadening of potential applications that they're exploring. And I would say that's a little further out in time, but we view that as a great indicator that the TAM may be significantly larger than what we first thought.

Perfect. And a really quick question, I hope, for Sherri.And apologies if I missed this, Sherri, but with the Aerospace and Defense divestiture and the leverage coming down below 2, which is great to see, is there an update on the way you're thinking about debt on the balance sheet or capital allocation?

Yes. So Ruben, really pleased that we were able to reduce our debt leverage down to 1.7x for the quarter after the $400 million debt paydown that you referenced from the sale of the A&D business. So I'm really pleased with that. And then we also mentioned that with the Munich division, product division that we announced that we would take the proceeds from the sale of that to pay off debt as well. That's expected to close a little bit later. And so once we do that, we'll take the proceeds from that as well. So certainly, debt reduction is a priority. But I would say the #1 priority now is -- continues to be making sure that we're investing for the long term in the business from an R&D perspective, from a CapEx perspective and making sure that we're really driving -- investing for the long-term growth. So that's the #1 priority. And then certainly, debt reduction, we'll continue to focus on that, but a close second priority.

Operator, we'll take one more question.

Our next question comes from Karl Ackerman with BNP Paribas Asset Management.

Just one from me. Jim, you spoke of record transceiver module bookings in datacom, but what about transceiver components for telecom? And as you address that, can you quantify the level of order visibility with your customers, maybe in terms of quarters as you and your peers seek to add both later and transceiver capacity and fulfill customer demand.

Thanks, Karl. Yes, we definitely saw a very strong record bookings on transceivers. But yes, I'm glad you asked about for components going into a number of our communications applications, DCI and telecom, I would say same story, record level of bookings there, too. I mean just tremendous bookings across both data center and communications. And on the second part of your question around visibility. So what we're seeing is in those bookings is the normal bookings of booking out in kind of the near term, but we're also seeing customers on top of that book further out in time where they're ordering -- they're putting orders in place in a year plus in advance. And I think that's really about -- they're seeing such strong increases in their demand and their supply needs that they want to get those bookings in place to get the supply coverage. And then the other very good trend from our perspective is, as I mentioned earlier in the call, our -- a number of our large customers now giving us very good forecast visibility, not just next year or the following year, but out into 2028. So very large customers providing us with visibility 3 years out, which is which is very, very helpful for our business.

Ladies and gentlemen, as we have come to the conclusion of the allotted time for today's call. I will now turn the floor back to Coherent's CEO, Mr. Jim Anderson, for closing comments.

Yes. First, thanks, everybody, for being on the call today. I feel like we're off to a very strong start for our fiscal year with almost 20% pro forma revenue growth and over 70% EPS growth in Q1 on a year-over-year basis, off to a really strong start. And again, we expect this fiscal year to be a really strong growth year for the company. I'd like to -- once again, I just want to thank all of my Coherent teammates for all of their great hard work, their dedication. Thank you very much. And thanks, everyone, for your support. Operator, that concludes our call.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.